Reminiscences Of A Trader

Straits Times Index

2008-03-04T23:06:00.003+08:00

Selling momentum will increase once 2900 is broken. Immediate support levels will be at 2880 / 2859 / 2746 / 2666.

Painting The Charts

2008-01-28T08:17:00.000+08:00

Charts do lie sometimes. The pros will always find some way to manipulate the markets. With more traders using candlestick patterns and technical analysis, some market makers take the opportunity of the newbies by painting the charts. Newbie candlestick readers and chart readers can get suckered by these tricks. That's why it is important to learn the mechanics of the indicators and methods. Just trying to find patterns and formations with a cookie-cutter mentaility is a sure-fire way to get conned out there. If you know why and how a reversal truly forms, you will not fall for these lame tricks.

Buy and Hold

2007-05-01T14:03:00.000+08:00

"Buy and Hold is far from the sure thing it's made out to be. It works in bull markets. It works if you invest in dribs and drabs, catching the ups and downs along the way. It works in mild bear markets, when declines are quickly reveres. It may work if you've got 20 years to wait for stock to recover from a half-off sale. Otherwise, it's risky. It's risky when you're holding stocks you bought at extravagant prices. It's extremely risky when your retirement depends on a positive result and you're planning to take up golf in a decade or less."

John Rothchild

China Energy

2007-04-07T19:02:00.000+08:00

Resistance: 1.23 / 1.28 / 1.32 / 1.36
Support: 1.21 / 1.19

Straits Times Index

2006-12-03T12:29:00.000+08:00

The short term support levels for the STI will be 2826, 2814, 2787 and 2771 (refer to the hourly chart).

Hang Seng Index

2006-12-03T11:54:00.000+08:00

Currently, the HSI is undergoing a short term correction. If the recent low at 18618.66 is taken out, the index may test its short term uptrend and also the 50-day moving averages (refer to the daily chart). If this critical levels are breached, the index may plunge to 17800 and 17304, which is the 61.8% and 50% fibo retracements of the uptrend since early June 2006.

City Developments

2006-10-24T17:37:00.000+08:00

City Dev is currently consolidating after failing to break $11.30 (which indeed turned out to be the short term top) two weeks ago. So far, the critical support level at $10.60 have been tested six times. Technical indicators are currently no longer overbought and unless the general market go into some major correction, I expect $10.60 to hold and another dip towards this level in the near term will be a good opportunity for those who are bullish in this stock to initiate another long position. Of course, in the event that $10.60 is broken decisively, the stock's price may head towards $9.90 which is also the 50% fibo retracement of $11.30/$8.40. As i've mentioned previously, if $11.30 is taken out, the stock's price will likely head towards $12.00.

Hongwei Tech

2006-10-07T23:48:00.000+08:00

City Developments

2006-10-07T23:30:00.000+08:00

The stock's price may have already hit a short term top at $11.30. Bearish divergence can be seen from the RSI and the MACD is turning down although that does not mean that the stock's price will go down immediately. Support levels will be at $10.90 followed by $10.60. If $10.60 fails to hold, expect it to consolidate at around $10.30.

On the other hand, if it manage to break $11.30 convincingly in the near term, it may eventually heads towards $12.00.

City Developments

2006-09-17T15:24:00.000+08:00

Still within a short term uptrend channel while mid and long term uptrend are still intact. In the short term, the stock is likely to face some resistance and profit-taking at $10.40 - $10.50 which is the upper trendline of the channel. In the event that this upper trendline is broken convincingly, I expect the stock to test $10.70 followed by 2006's high at $11.10. Position traders can use the lower trendline of the short term channel as a guide for their trailing stops. At the current level ($10.20), it is trading above its 61.8% fibo retracement.

Gann's 28 Trading Rules

2006-09-11T01:49:00.000+08:00

The Rules given below are based upon W. D. Gann's experience:

1. Amount of capital to use: Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.

2. Use stop loss orders. Always protect a trade when you make it with a stop loss order.

3. Never overtrade. This would be violating your capital rules.

4. Never let a profit run into a loss. After you once have a profit, raise your stop loss order so that you will have no loss of capital.

5. Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts and rules.

6. When in doubt, get out, and don't get in when in doubt.

7. Trade only in active markets. Keep out of slow, dead ones.

8. Equal distribution of risk. Trade in two or three different commodities, if possible. Avoid tying up all your capital in any one commodity.

9. Never limit your orders or fix a buying or selling price. Trade at the market.

10. Don't close your trades without a good reason. Follow up with a stop loss order to protect your profits.

11. Accumulate a surplus. After you have made a series of successful trades, put some money into a surplus account to be used only in emergency or in time of panic.

12. Never buy or sell just to get a scalping profit.

13. Never average a loss. This is one of the worst mistakes a trader can make.

14. Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.

15. Avoid taking small profits and big losses.

16. Never cancel a stop loss order after you have placed it at the time you make a trade.

17. Avoid getting in and out of the market too often.

18. Be just as willing to sell short as you are to buy. Let your object be to keep with the trend and make money.

19. Never buy just because the price of a commodity is low or sell short just because the price is high.

20. Be careful about pyramiding at the wrong time. Wait until the commodity is very active and has crossed Resistance Levels before buying more and until it has broken out of the zone of distribution before selling more.

21. Select the comodities that show strong uptrend to pyramid on the buying side and the ones that show definite downtrend to sell short.

22. Never hedge. If you are long of one commodity and it starts to go down, do not sell another commodity short to hedge it. Get out of the market; take your loss and wait for another opportunity.

23. Never change your position in the market without a good reason. When you make a trade, let it be for some good reason or according to some definite rule; then do not get out without a definite indication of a change in trend.

24. Avoid increasing your trading after a long period of success or a period of profitable trades.

25. Don't guess when the market is top. Let the market prove it is top. Don't guess when the market is bottom. Let the market prove it is bottom. By folllowing definite rules, you can do this.

26. Do not follow another man's advice unless you know that he knows more than you do.

27. Reduce trading after first loss; never increase.

28. Avoid getting in wrong and out wrong; getting in right and out wrong; this is making double mistakes.

City Developments

2006-08-20T17:26:00.000+08:00

Refer to my previous technical view on CDL (7th August). The stock's price has since risen 7.2% to close at $9.70 on last Friday. So what's next? The various weekly technical indicators which I used have just started to turn up and although profit-taking can be expected in the near term, any pullback will be a good opportunity for those who are bullish in this stock for the medium term to accumulate more.

Resistance: 9.75 / 10.00 / 10.30
Support: 9.45 / 9.25

Has the Fed engineered a soft landing?

2006-08-20T12:19:00.000+08:00

The Bull corner : Ed Yardeni

Ed Yardeni, chief investment strategist at Oak Associates, is one who believes the market is ready to move on up and out, as the economy is going to continue growing strongly and inflation will not be a problem.

WSJ.com: So has the Fed engineered a soft landing?

Ed Yardeni: I'm not sure it's a landing at all. The economy is growing along its trend line, at roughly 3% to 3.5%. And since much of that growth is coming from productivity, it's not inflationary. That really means this is the best-of-all-worlds scenario, allowing the Fed not only to pause, but maybe to leave rates unchanged for a while.

I think a federal funds rate of 5.25% [its current level] or 5.5% is neutral, and at neutral you can have sustainable trend growth with low inflation. It looks as though the Fed is getting its forecast: It wanted to see some slowing with inflation moderating, and the latest data are showing that.

WSJ.com: The Fed doesn't have a reputation for managing soft landings; it is usually accused of going too far in its tightening campaigns.

Yardeni: It did accomplish one in the 1990s. The Fed raised interest rates a lot in 1994 and then more or less left rates alone. Bond yields stabilized, inflation remained low and the economy did just fine.

WSJ.com: This sounds suspiciously like the fabled Goldilocks scenario.

Yardeni: I recently pointed out that many economists have been waiting for Godot -- a mid-cycle slowdown or a soft landing or even a recession. But Godot is a no-show, while Goldilocks is doing quite well. There are still bears out to get her: People are still out there fretting about the trade deficit, the federal budget deficit, a super-spike in oil, geopolitical jitters and more. But the economy has weathered all of these storms awfully well, and all in all we do have a Goldilocks scenario unfolding.

WSJ.com: How long could such a thing go on?

Yardeni: I think it could certainly continue through the end of the year and into next year -- then ask me again.

I really believe the unleashing of globalization through the increase of free trade and the interdependence of financial markets is creating global prosperity, and what we're learning is that it's not a zero-sum game: If Asians are doing well, Americans can do well. We're at full employment. When you look at consumer measures, some economists interpret big increases in compensation as inflationary. But that just proves consumers have the purchasing power to keep spending.

WSJ.com: But housing is clearly slowing down.

Yardeni: That's not a surprise -- we started to see signs of it last fall when surveys were showing people saying they couldn't afford to buy homes. Prices got too high. Housing is in a cyclical downturn.

WSJ.com: Isn't that bad news for the economy?

Yardeni: It's an important industry, but it's still pretty tiny compared to the overall economy. And while residential construction is slowing down, what people have mostly missed is that there is a huge boom in non-residential construction. The data show we are building hotels, offices, commercial properties, manufacturing facilities and warehouses.

WSJ.com: But several economists have noted that housing contributes fairly significantly to economic growth in other ways, including employment.

Yardeni: That's true, but a slowdown doesn't imply that we are therefore going to lose a lot of jobs. We have a 4.2% adult unemployment rate [which doesn't include teenagers]. Lots of industries need to hire. I think what the bears are missing is that this is a very dynamic economy, thanks to globalization. We are creating lots of jobs in the railroad industry, in trucking, warehousing and importing all the stuff that has to be processed and moved. We need people who can sell the goods that foreigners want and who can manage the financing of these transactions.

WSJ.com: So what does this mean for investors? For months we've heard people talking about getting defensive. Is risk-aversion the wrong idea now?

Yardeni: We're starting to see the mood swing away from risk aversion. You may remember back in May when we saw emerging markets sell off. They've already regained half of what they lost. I think we'll see investors coming back to cyclicals and industrials -- all the stocks that were weakest in May, June and July should do better.

WSJ.com: You mentioned in a recent note that price/earnings ratios should rise again after the Fed stops raising rates. The S&P 500's average P/E ratio is nearly 15, lower than its historic average of 16 [using trailing, GAAP earnings, which include one-time items], but not nearly as low as it has been at moments when stocks were a screaming buy. It doesn't seem as if P/Es have all that much room to rise.

Yardeni: Stocks are usually cheapest when you are in recessions that look like depressions -- then you get P/E ratios as low as eight. Those are typically associated with significant economic downturns. And those downturns also had very high inflation rates -- you get the worst P/Es when you have stagflation.

WSJ.com: Some people say that's where we're headed.

Yardeni: They are either too young to remember the 1970s or have lost perspective. Stagflation is when the economy is barely growing or is in recession and inflation won't go away and is in double digits. That's not the case now.

There is no reason P/Es need to go to eight. The recent drop in the average P/E has occurred not because prices have collapsed, but because earnings have soared, and that is not reflected fully in prices.

I think investors are still trying to figure out what stocks they should be paying a high multiple for. Just as over the past five years we have seen P/Es decline and converge, over the next five years we will see P/Es go up as investors figure out which companies will generate enormous earnings in competitive markets. And they could be all over the map -- in tech, health care, energy or other sectors -- so we could have a broadening out of the market.

The Bear corner : John Mauldin

John Mauldin is president of Millennium Wave Advisors, LLC, a Texas investment advisory firm, and Millennium Wave Securities, a broker-dealer. He believes the economy is likely to slow more sharply than markets realize, even as inflation remains a concern -- a bad combination for stocks.

WSJ.com: You have long been concerned about rising inflation and a potential slowdown in the economy. Recent data seem to have Wall Street feeling better about both. Are you heartened by the same data, or still concerned?

Mauldin: I'm still concerned. What did we see this week? We saw inflation coming in relatively high again and housing coming down. One of our best forward-looking indicators, the yield curve, is inverted. Everybody always says, "This time it's different," but so far it has never been different. I get nervous when you fly in the face of an indicator that is consistently right -- and that is confirmed by other indicators.

The Conference Board's index of leading economic indicators [has fallen at a 1.4% annualized pace in the past six months]. Every time it has turned down in a six-month stretch in the past, we have had a serious slowdown or recession. Another very good leading indicator is the ratio of concurrent to lagging indicators. That has been going down, and that trend has always been followed by a serious slowdown or recession.

WSJ.com: That doesn't seem to be what the market is expecting.

Mauldin: The market is betting the economy is only going to slow down to 2% growth or so. But a significant chunk of this economy is powered by housing. If housing slows down, it is going to take one or two percentage points off GDP. And if people can no longer use their homes as piggy banks, then that will take another half point to one percentage point from GDP.

WSJ.com: What about corporate profits?

Mauldin: Corporate profits are at record all-time highs in terms of their percentage of GDP -- meaning you can't get much better than this. And that's a mean-reverting statistic. It always reverts to the mean.

WSJ.com: What does that mean for stocks?

Mauldin: When everything is priced for perfection -- and we are pretty perfect, I think -- that's a difficult situation in which to be bullish on the stock market.

WSJ.com: Are we really priced for perfection? P/E ratios seem to be at reasonable levels.

Mauldin: John Hussman [manager of the Hussman Funds] has said that if you normalized earnings, meaning if you took earnings back [from a record-high percentage of GDP] to where they would normally be, the P/E for the S&P would be closer to 24 or 25. If you revert earnings to the mean, you're looking at real room to fall. I think there are better opportunities, with less downside risk, where you can put money to work.

WSJ.com: What are they?

Mauldin: Bonds. I think a laddered portfolio of bonds [which spreads an investor's money across bonds of different maturities] is where you want to be. You should be in absolute-return funds [which try to avoid exposure to the broader market]. PIMCO has a couple run by Rob Arnott. For the average guy it's tough -- he doesn't have as many opportunities.

WSJ.com: How long could this situation last?

Mauldin: I think we will see another bull market in the 2010s that will be every bit as big as what we had in the 1980s or '90s. I think it will be driven by another round of telecom, tech, biotech, nanotech and globalized platform companies. I think it will be a really powerful rally -- but not from here. We have just got to hit the reset button on some imbalances.

WSJ.com: Some people point to the fact that the Fed has managed a soft landing before, in 1994. How does this period compare?

Mauldin: I don't think it's a fair analogy. The consumer wasn't nearly as tapped-out then. Corporate profits weren't as strong, so there was plenty of room to improve. It was a much rougher period of time, and P/E ratios were much lower. And remember, back then we had inflation and interest rates coming down. We're not watching inflation coming down now.

WSJ.com: What about this week's weaker inflation numbers?

Mauldin: What people didn't notice in the PPI is that finished consumer goods were up 5.1%. Core intermediate goods were up 0.7%, and intermediate goods were up 8.9% year over year. If the economy is slowing down, then inflation should begin turning over as well. But the Fed will have to attack it.

WSJ.com: You recently wrote a note entitled "The Return of Stagflation." A lot of people scoff at the idea, saying we are nowhere near the ugly stagflation of the 1970s.

Mauldin: We have a slowing economy and rising inflation -- by any other name that's stagflation. And given all the excesses of the 1990s and the excesses of the housing market, a little stagflation -- maybe including a mild recession -- may be about the best outcome we could ask for. I think, ten or 15 years from now, historians will say the Fed did a pretty good job.

WSJ.com: But a recession is no picnic.

Mauldin: Well, if we do have a recession, I don't think it will be severe. Eighty percent of our economy is service-oriented, not subject to the ups and downs of manufacturing. Meanwhile, a lot of our manufacturing is export-driven, and a weaker dollar is just going to help that.

So I'm not looking for a repeat of 1980 or 1982, barring some silly Fed mistake. I think we're going to have another 1990/91, 2000/01 kind of slowdown. If there's a recession, it will be a mild recession, and then another weak recovery.

source: The Wall Street Journal Online

City Developments

2006-08-07T00:01:00.000+08:00

Chart-wise, the stock's price is currently still in a major uptrend channel and based from the various technical indicators used, the current consolidation could be ending soon. Caveat emptor.

Resistance: 9.25 / 9.50
Support: 8.80 / 8.45

What's next for the STI?

2006-08-01T23:17:00.000+08:00

As expected, the STI tested the 2450 resistance level yesterday but failed to close above it. So what's next?

I think it's not ready to break out of its trading range yet since it is taking its cue from the US market, which have yet to clear the critical resistance levels at 11257 (DJIA), 1280 (S&P500) and 2100 (Nasdaq). So in the short term, regardless whether National Day is coming next week, I think the local bourse will mostly be driven by external factors although there will be some rotational plays among those companies which are about to release their corporate results soon.

Technically, in the next one week or so, I expect the STI to trade between 2400 - 2456.

Has the STI bottomed out?

2006-07-24T23:16:00.000+08:00

I think the STI has already bottomed out, at least in the short term and looks ready to retest 2450 in the coming days. As for the medium term outlook, i am no longer bearish since middle of last week and the STI may resume its medium term uptrend once it close above 2450 convincingly on a weekly basis. :-)

Global Voice

2006-07-17T20:59:00.000+08:00

Based from the weekly chart above, Global Voice is currently trapped in a downtrend channel with lower highs/lows seen. Immediate support is at 0.125 followed by 0.105.

I used to trade this stock actively in the 2nd half of last year as the stock's price rose from a low of 0.05 to a high of 0.22 within a short period of 6 months. Unfortunately, there are some investors and punters alike caught buying at the high levels. For those with vested interests, keep an eye on the critical support level at 0.105.

Dealing With Panic

2006-07-16T17:47:00.000+08:00

Have you ever been caught off guard in the midst of a trade? In an instant, you may lose control of your emotions? It may not happen all the time, but it does happen. Consider the basic scenario. You may have thought you had a well-developed trading plan. You executed it, monitored the markets, and suddenly, it all went wrong. You became agitated. You could no longer think straight. You were caught off guard, and thrown into a state of anxiety and panic. When things don't go your way, it's easy to feel frustrated and disoriented. In a sense, there is little you can do but acknowledge that you have lost control, and that you better struggle to minimize the damage. Our brains are wired for primitive responses, and this faulty wiring can throw us off balance at times. Just like wild animals, when things don't go our way, our thinking gets cloudy, and we instinctively try to take physical action, such as fighting an opponent or running away. But when trading the markets, this is not an optimal strategy. What we need to do, and may have trouble doing in a panic state, is think clearly, rationally, and take appropriate action. In an extreme state of panic, though, you will not be able to think logically enough to think on your feet and make an astute midcourse correction. There are steps you can take, however, to deal with an unexpected, panic state with grace.

First, planning ahead, and working under the assumption that things go wrong, helps. Getting caught off guard is often the main precursor to a state of panic. If you are caught off guard, and start to panic, you will have difficulty gaining your composure and acting rationally. The best protection is to assume that adverse events may happen. Don't fool yourself into thinking you are immune from things going wrong. Bad things do happen to good traders. How do you prepare for adverse events? Don't trade with a vague trading plan. Consider all possible adverse events, and consider how the price may move in ways that you had not anticipated. Specify the signals that will tell you at what point you should logically abandon your plan. Outline the plan in as much detail as possible, when you will enter, when you will exit, and indicators you will look at to determine how well the markets are behaving according to plan. If you have a well-defined plan, you can react decisively even during a panic state. If a plan is well formulated, then it's easy to follow, even in times of extreme uncertainty and stress. By having a well-defined trading plan, you can follow it even when you are frustrated and agitated. And if you can follow your plan, you'll minimize the damage that a panic state can cause.

A second major precaution is risk management. If you risk money you can't afford to lose, the stakes will be too high and you'll know it. You'll feel on-edge, as if something bad is about to happen. If you manage risk, though, you'll know deep down that you are safe even when the market moves against you. You'll feel more at ease, and be able to instinctively think, "I'm protected. Just calm down, and follow the plan. I'll survive."

Trading can be stressful at times. An unexpected adverse event, or seemingly erratic market action, can throw you off balance. And once you are knocked off balance, it's hard to regain your composure. You won't know what to do. Don't wait to be caught off guard before taking action. When you are thrown off balance, you may not recover fast enough, but if you trade with a detailed trading plan that you can easily follow even in the midst of a state of panic, and if you have carefully managed risk, you will be able to gain some emotional control, and minimize the damage. Don't wait until it is too late. Take action before the markets catch you off guard.

Back In The Zone

2006-07-11T22:39:00.000+08:00

Trading can be especially enjoyable when you are trading at your peak. There are times when everything just seems to click as you move effortlessly with the ebb and flow of the market. There are various names for this optimal state of mind, such as "trading in the zone" or "flowing with the markets." But whatever you call it, traders in this ideal mental state almost completely lose themselves in what they are doing. They are focused only on the ongoing process of the moment. They are not self-conscious, concerned with how well they are doing or worried about doing poorly. Their complete attention is focused on trading. Unfortunately, we are not always in this optimal state of mind. We get thrown off our game. We experience setbacks, and when we face disappointments, we lose our mental edge. When we are out of sync with the markets, it's useful to get back in the zone. The best way to regain your mental edge is to look at your assumptions about trading. Many times, we put too much pressure on ourselves, expecting miracles when we are merely humans.

It is all right to be naïve. Many times we believe we must have perfect knowledge and know exactly what will happen next. But few people have such a wealth of experience with the markets that they can anticipate every possible market move or adverse event. Always remember that you are human. You cannot know everything, and that is all right.

And because you are human, it is vital to remember that you are not perfect. It's useful to approach trading with the mindset, "I can make occasional mistakes. It's understandable." It's impossible as a trader to be thoroughly competent, adequate, and achieving all the time. Certainly, you should develop an extremely detailed trading plan and try to account for all adverse events that may go against your plan, but there are limits to what you can do. Your trading idea may just not pan out, and there's little you can do about it besides taking proactive steps, such as managing risk and having clearly defined exit strategies to protect your long term financial interests. Holding yourself up to unrealistic standards is just going to make you feel frustrated, fearful, and unnecessarily uptight. By accepting your limitations, and trying to work around them, you'll feel more at ease, and ready to capitalize on a high probability setup when you come across it.

It's also vital to take losses in stride. You can lose money and allow yourself to not feel like a loser. It's hard to take losses, and when you encounter a string of losers, it's natural to feel shaken and uncertain. But the worst thing you can do is stay on the ground after you have taken a fall. It's useful to get back in the zone. You may decide to scale back and make a few small trades to try to regain your edge. Or you may decide to stand aside and merely study the markets in order to get a feel for how the markets are moving. Whatever you do, however, don't stand still. Keep moving, even if it is just thinking rather than acting. If you can keep your mind moving and trying to solve problems, you will regain your mental edge.

It's easy to get thrown off by setbacks and lose your mental edge, but there is a big difference between feeling permanently beaten and temporarily off your game. If you keep problem solving and try to take active steps to get back into the zone, you will get there, and feel like a winning trader once again.

source: Innerworth

R.I.P, The Yen Carry Trade

2006-07-09T00:27:00.000+08:00

by John Mauldin

Poor Ben. The real culprit is one Mr. Fukui, who is the Governor of the Bank of Japan. While central bankers everywhere are in a struggle to prove their manliness by being harder on inflation than their peers, Mr. Fukui has shown to be the clear cut champion. They have taken massive amounts of liquidity out of the Japanese system in the past few months.

George Soros, commenting recently, brought home the point: "I think we are in a situation where almost all the asset classes will be under pressure or are under pressure and the main reason for that is the reduction in liquidity. What people do not realize is that the Japanese Central Bank has withdrawn something over $200 billion worth of excess liquidity from Japanese banks. Now that money was not put to work in Japan because there was no room for it, a lot of that went abroad, went into emerging markets, there was a so-called carry trade and it is not that suddenly people are risk averse. It is really that liquidity has been drawn out of the market and that is affecting emerging markets."

$200 billion in a global economy may not sound like a lot. But remember this was money in fractional reserve banks. They could easily multiply it several times. Pretty soon we could be talking a trillion dollars. Much of it went into providing cheap liquidity to global hedge funds and aggressive investors and banks. Thus, as the leverage went away, these groups started liquidating their very profitable emerging market trades, their commodity trades, and so forth. Everything began to go down at once. Markets that had not been historically correlated all of a sudden went down in tandem to the drumbeats of margin clerks everywhere.

There have been three large run-ups in the Japanese monetary base in the last 30 years. Not so coincidentally, there were three large periods of asset inflations which accompanied them. When the Bank of Japan began to tighten, we had resulting deflation of those assets. As I quoted GaveKal last April:

"Looking at the past thirty-five years, we find that the Japanese monetary base has been allowed to double over short periods (i.e.: less than three years) three times. Each time, it led to massive bull markets (real estate, share prices, commodities, gold, etc...), followed, some time after the expansion of Japan's money supply was over, by a serious market downturn. Will this time prove any different? So far, it has."

That was at the end of April. At the end of June we can see that it has not been any different. World stock markets have dropped precipitously along with commodity prices.

For several years, speculators have been able to get very low interest rate money in a currency that was purposely being held down. It doesn't get any better than that. Low cost money encouraged speculation in every corner of the investment world. Not just stocks and commodities, but high yield and emerging market debt. The yen carry trade fueled the investment world.

Now Japan has said not only are we going to take massive amounts of money supply from the world, we are going to raise rates and allow the yen to rise. All that "free" money investors and businesses around the world borrowed is going away. It is going to become far less than free. By-by carry trade. Fukui indeed.

In our world, two actors can create money out of thin air: the central banks, and the commercial banks. Over the past year, the world's central banks have been busy draining liquidity from the system.

"While the central banks were busy taking money away, the commercial banks were happy to multiply whatever money they had at an ever faster pace. This is now changing; with the increase in volatility, commercial banks are pulling back. As Mark Twain once said, commercial banks lend you an umbrella, then take it away once it is raining."

"The divergence between the action of central banks and the action of commercial banks recently reached unprecedented levels. In the past (1997, 2000), once the commercial banks got a whiff of the message the central banks were attempting to convey, they changed their behavior rapidly, and uniformly. Will we now witness a sharp snapback as we did in 1997 and 2000?"

OK, remember they asked the question in April whether Japan taking liquidity off the table would be different this time? It wasn't. And my bet is that commercial banks will also start the process of taking liquidity off the table as well. Loan committees are going to tighten their requirements on all types of lending. Get used to it.

Between the central banks of the world almost universally tightening, commercial banks poised to tighten and the US housing market looking like it is going to slow as interest rates rise, it is very likely the US economy is going to slow down in the last half of the year. The question is, "How much?"

I do not think we will be in an actual recession by the end of the year. But a recession is not out of the question for 2007. If the Fed does not have to go too far (and 5.5% may be too far given the other conditions in the world), then we could see a slowdown on the order of what we saw in the mid-90's. We will have to watch the yield curve and other indicators.

In any event, whether it is slowdown or recession, I think investing in the broad stock market is particularly risky. If you are good at picking stocks and know the companies you are investing in, that is one thing. But most readers invest in mutual funds and broadly diversified stock portfolios. Bluntly, I think there is some real risk to the downside.

And if the US economy slows down, so will the housing market and so will the US consumer. That will be a drag on the world economy and world growth in consumption. If the world slows down too much, you could see oil drop back into the $50's or even $40s!

source: www.frontlinethoughts.com